Commodity demand seen positive on strong manufacturing numbers

The latest OECD composite leading indicators (CLIs) released last week point to an improving economic outlook in most major economies. The CLIs are designed to anticipate turning points in economic activity relative to trend and currently they show signs of an improvement.

While the lead indicators for the US point to growth around trend, in the Euro area a positive change in momentum is seen. However, in the emerging economies while it shows growth around trend, a tentative positive change in momentum is seen for China, Russia and India.

The positive relationship between global economic growth and commodity consumption, especially growth-commodities such as energy products as well as industrial and base metals, is well recognised.

With the year-end nearing, markets are likely to trade range-bound or sideways. The FOMC meeting this week is keenly awaited. Will that big decision – tapering – be taken?

Although unemployment has fallen to 7 per cent, it is likely that the policymakers may wait for evidence that inflation is stabilising and that GDP growth will firm in early 2014.

So, the recent pick-up in manufacturing activity suggests that commodity demand in 2014 would be positive. However, price performance of individual commodities will depend on their own market fundamentals and other non-fundamental drivers.

Last week, on the LME, base metals complex had a strong week. All base metals prices were up except tin that was down by 1.8 per cent as a result of weakening concern over Indonesian export ban. Zinc outperformed with a rise of 4.6 per cent as the front end of the forward curve tightened, an expert commented. This was followed by lead up 3.2 per cent, nickel 2.5 per cent, copper 2.2 per cent and aluminium 1.2 per cent.

Precious metals were flat in London market last week. Palladium was down by a hefty 2.4 per cent over the week, while gold edged lower and silver as well as platinum remained nearly unchanged.

Oil WTI was down 1 per cent.

The market continues to be under pressure with enervated physical offtake, fears of tapering and reduced liquidity, the dollar looking to gain strength and perceived return on investment poor.

Imports into the world’s biggest consuming market India continue to be slow as a result of tight regulations.

Fragile Gold

On Friday in London, gold PM Fix was $1,232 an ounce, up from the previous day’s $1,225.

Silver was down on Friday with AM Fix of $19.55 versus previous day’s $19.80. Platinum moved down to $1,367 ($1,371) and palladium $723 ($729).

Given the lack of robust physical demand, exit of investors to more lucrative assets, outflows from ETPs and apprehensions of US tapering anytime soon gold prices can potentially sink below $1,200/oz in the near future.

In the event, there could be more outflows from ETPs. It is estimated that as much as 100 tonnes will become loss-making. So, gold is on a fragile floor.

Metals gain

The recent rally in base metals has been driven by short-covering because of year-end positions squaring-off and reduced short exposure given growing upside risk, according to experts.

The flow of strong manufacturing data is welcome. At the same time, Indonesia has been suggesting that it will go ahead with ore export ban.

On Friday, LME cash copper closed at $7,277, aluminium $1,755, zinc $1,976 and tin $22,750/tonne. The market made some gains on Friday despite the fact that Shanghai stocks of copper, lead and zinc all rose. However, overall copper stocks on exchange fell 2.5 per cent helped by a further 15,100 tonnes drop on the LME.

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